Quality of Accruals and Earings

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The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors: Discussion

Author(s): Maureen F. McNicholsReviewed work(s):Source: The Accounting Review, Vol. 77, Supplement: Quality of Earnings Conference (2002),pp. 61-69Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/3203325 .

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THEACCOUNTINGEVIEWVol. 77Supplement002pp. 61-69

DISCUSSIONFT h e Qual i ty o f Accrua l s a n d

Earnings: T h e eo l e o f AccrualEstimation E r r o r s

Maureen F. McNicholsStanford UniversityABSTRACT:echowand Dichev 2002)modelearningsquality s the mag-nitudeof estimation rrorsnaccruals,andprovide mpiricalstimatesof thisconstructbased on the relationbetweenaccrualsand cash flows.Icharac-terizethe innovation nd limitationsn this approach,and provide mpiricalevidenceof measurement rror ntheirempirical pecification. also adapttheirmodelto assess the specification f the Jones' (1991)modelanddoc-ument hatthis modelprovidesestimatesof discretionaryccruals hat aresignificantlyssociatedwithcash flows,which are likely o be substantiallynondiscretionary.concludewithsuggestions orfuture esearch n earningsquality ndearningsmanagement.Keywords: arningsquality;ccruals; ash flows;earningsmanagement.

I. INTRODUCTIONT he paperby DechowandDichev(2002)(hereafter D)proposes measure f thequalityof accrualsandearningsbased on the extent to whichaccrualsmapinto cashflow realizations n contemporaneousndadjacent imeperiods. Underpinningheirmeasure of earnings qualityis the notion that accruals are estimates of futurecash flowrealizations,so that the qualityof accrualsandearnings s an inversefunctionof the pre-cision of these estimates. Economic and structural actors can cause variationin theprecisionof accrualsestimates(acrossaccounts or a givenfirm,fora givenfirmovertime,and across firms),regardlessof the presenceor absence of managerialnterventionsn thereportingprocess. In addition,managerialexpertisewill affect the precisionof estimates,even if other factorsthat affect precisionare held constant.As a result,a less-than-perfectmappingbetweenaccrualsand cash flows in adjacentperiodscan reflectfirms thatreporthonestlybut face uncertain conomic environments,irmswhose managersare less expert

I gratefullyacknowledge he helpfulcomments of participants t TheAccountingReviewConferenceonQualityof Earnings. also especiallyappreciatehe commentsof StephenRyanand Katherine chipper, ndtheableresearchassistanceof YulinLong.61


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The AccountingReview,2002 Supplementat estimation, and or firms whose managers intervene in the process to manipulate accruals.My discussion aims to shed light on the contribution of DD's paper by characterizing itsinnovationandlimitations,andby putting t in the context of related iterature.My discus-sion concludeswith suggestionsfor futureresearchon earningsquality.

II. DECHOW AND DICHEV'S DEFINITION OF EARNINGS QUALITYThe accounting iterature ncludesseveral definitionsof earningsquality.Some defineearnings as high quality if earnings are persistent, an attribute based solely on the time-series properties of earnings. Some define earnings as high quality if earnings accuratelyrepresent the economic implications of underlying transactions and events. Some, and thisincludes DD, define earnings quality in terms of the relation between accruals and cashflows. DD's definition does not distinguish among the various factors that influence thisrelation-the uncertainty in the firm's environment, the ability of management, the extentto which accruals are manipulated-but some approaches to defining earnings quality do.'DD characterizehelinkagebetweencurrent ccrualsand cashflowsin theimmediatelyadjacent periods. Recognizing that accruals may arise following some cash flows and inanticipationof others,they develop a model that reflectsestimation error in anticipatedcash flows.2Theycharacterize ggregateaccrualsas the sum of openingandclosingdeferralandaccrualentries.Specifically:

A, = CFt_t - (CF,tt+ + CFtt-1) + CFt+lt +Et+lt - 1 (DD4)where:

At = currentaccrualsrecognized n periodt;CF,S= cash from operations realized in period t and recognized in period s; andets= estimationerrorassociated with accrualsrecognizedin periods and cash flowsrealized n periodt.The firstandfourth terms reflectrecognitionof cash flows realized in t-1 and to berealizedin t+ 1. The second term defersrecognitionof cash flows realizedin t that are tobe recognized n t+ 1, and the thirdterm reflects cash flows realized in t thatwere recog-nized in t-1. The fifth and sixth terms reflect the estimationerrorin periodt's open-ing accrualthat will be realizedin t+l and the closing error for periodt-l realizedinperiod t.Estimationerroris defined as the difference between the amountaccrued and theamount ealized.Thereforeperiod 's earnings ncludetheopeningerror hatwill be realizedin t+ 1 whenthe relatedcash flows are realized and thereversingerror romthe cash flowsrealized n periodt thatdiffer from the amountaccrued n periodt- 1. DD define thequalityof accrualsandearningsas the magnitudeof these errors.Cash flow realizations n periods priorto t-1 and subsequent o t+1 are assumed tobe beyond the horizon reflected in currentaccruals. That is, the approach they take requires

See for example,Jonasand Blanchet 2000)for discussionof dimensionsof financial eporting uality,PenmanandZhang 2002)for discussionof the role of accounting hoices andestimateson thesustainabilityf earnings,andthe literature n earningsmanagement,e.g., Healy [1985],Moses [1987],McNichols andWilson[1988],Schipper 1989],Bernard nd Skinner 1996],Demskiand Frimor 1999],HealyandWahlen 1999]for discus-sion of management'sncentives o intervene n the financial eporting rocess).2 Theirmodeldoesnot considerhowever, ubsequentevisionof a prioraccrual, uch as aninventorympairment.

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McNichols-Discussion of The Qualityof AccrualsandEarnings

an estimatedcoefficientfor everyperiodin which there is a pertinentaccrual.In a modelof, say, deferred axes or depreciation, his is a long series of leads/lags indeed,andthemodel is not operational.The approachrequires hat the key elementof accruals/earningsquality s in the currentaccruals.This is a significantassumption hat imitstheapplicabilityof theirapproach o firms with operations hat are shorter-termn nature.TheDD definitionof earningsqualitydiffersfrom thatof ComiskeyandMulford 2000)who define earningsas high qualityif the contemporaneousash flows are greater(less)than therecognizedrevenuesor gains (expensesor losses), andlow quality f the associatedcash flows areless than(greaterhan)therecognizedrevenuesorgains (expensesorlosses).This view considersa firmwith significantunearned evenueanddeferredexpensesto havehigh-qualityearnings,and a firm with significantaccruedrevenueandprepaidexpensestohave low-qualityearnings.In contrast,DD defineearningsto be of equal qualityfor firmswith high vs. low realizationsof the sum of the error erms in Equation 4) if the varianceof the sum of the errors or the firms is equal.Their notionof earningsqualityassumes asymmetric oss function,thatinvestorsare indifferentbetweenestimationerrors hat over-state andunderstateuturecash flow realizationsby an equal amount.The estimation errorsare assumedto be independentof each other and of the cashflow realizations.The discussionin the papersuggeststhis assumption s plausible,butthisarisesfrom the focus on the behaviorof totalaccruals.DD do not separately onsiderhowtotal accrualsmight be affectedby the behavior of discretionaryaccruals.Priorliteraturesuggests that estimation errorscaused by managementdiscretion are not likely to be in-dependentof each otherand of the cash flow realizations,andtherefore uggeststhatDD'sanalyticalmodel andpredictionsmay not applyin a contextof greatinterest,where man-agement intervenesin the financialreportingprocess to alter perceptionsof the firm'sunderlyingperformance.Forexample,Demski and Frimor 1999) developa model in which discreteness n thepayoffs to the agentcauses the magnitudeof manipulation o be nonlinear n what mightbe called pre-managed arnings.Healy (1985) suggests discretionary ndnondiscretionaryaccrualswill be uncorrelatedwhen pre-managed arningsare less thanthe earnings argetandmanagement annotmanipulateupwardsufficiently o achievepositiveresults,but willbe negativelycorrelatedwhen earningsare greater hanthe target.McCullochand Black(2002) show that, if managementaltersaccruals n responseto fluctuations n nondiscre-tionaryaccruals o achievea smoother ncome series,thennondiscretionarynddiscretion-aryaccrualswill be negativelycorrelated.Furthermore,heyargue hatdiscretionn accrualscan induce correlationin errors across years, as managersexercise income-increasing(-decreasing)discretion n low- (high-) earnings years and reversethis discretion n sub-sequent high- (low-) earnings years.Empirical evidence also documents that discretionary accrual estimates are correlatedwith earnings performance. Dechow et al. (1995) and Kasznik (1999) find that firms withhigher (lower) earnings exhibit significantly positive (negative) discretionary accruals, sug-gesting earnings management varies with earnings or that the Jones (1991) model used toestimate nondiscretionary accruals is misspecified. Beaver et al. (2002) find that propertyand casualty insurance firms' loss reserve errors are significantly more negative for firmswith large positive earnings than for firms in other regions of the earnings distribution,suggesting firms in this industry with large positive earnings use discretion to lower earn-ings. Thus, the theory and evidence suggests incorporating management's incentives toexercise discretion over accruals in the model will result in different implications than thoseof the present model.

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The AccountingReview,2002 SupplementIII. EMPIRICAL IMPLEMENTATIONDD characterize the "empirical version" of Equation (4) as:

AWCt = bo + b, CFO,_l + b2 CFOt + b3 CFOt+I + Etand measure earnings quality as the standard deviation of the residual. This section dis-cusses three issues raised by the empirical implementation of the DD earnings qualitymeasure: the standard deviation of the residual as a proxy for earnings quality, the differencebetween reported cash from operations and the cash flows related to period t, and theimplications of common firm transactions for the residual term.First, the standard deviation of the residual, in theory, is the estimated square root ofthe variance of the dependent variable conditional on the explanatory variables. This mea-sure therefore reflects absolute variation in the residual rather than variation relative to thevariation in accruals. Holding the R2 of the model constant, firms with more variable ac-cruals will have a higher standarddeviation of the residuals, so firms with greaterunderlyingvolatility in earnings are classified as having lower quality earnings. In this sense, theempirical results in the paper relating DD's empirical proxy to the absolute magnitude ofaccruals, and to the standard deviations of sales, cash flows, accruals, and earnings, arelikely to be induced mechanically, in that variability in the residual is increasing in vari-ability in accruals, which in turn is correlated with variability in sales, cash flows, andearnings.The inverse empirical measure of quality in the paper is the standard deviation ofresidual accruals, but, and given the mechanics of OLS regression, this measure will belarger for firms with large absolute accruals holding relative estimation error constant. Theresults would be more readily interpretableif the relative variance of the errorswere shownto be associatedwith proxiesfor environmentsn which it is difficultto forecast.In otherwords, for firms where the R2 in DD's empirical equation is high (low), one would expect,other things equal, an environment where forecasting ability is great (small).A second issue with the empirical specification, which DD note, is that the cash fromoperations data available to researchers includes cash flows realized in a period that arerecognized in multiple periods, in contrast to the theoretical specification, which includesonly cash flows recognized n periodt but realizedin periodst- 1 or t+ 1, and cash flowsrealized in t but recognized in periods t- 1 and t+ 1. Their empirical specification has errorin the independent variables, leading to biased coefficients. They analyze this issue inAppendix B and their simulations indicate that the effect of the measurement error is tobias downward the coefficients on all three cash from operations variables in their equation.However, in addition to the amounts included in cash from operations that are outsidethe model, a number of other items can affect the analysis. For example, to the extentsample firms participate in mergers and acquisitions, or in divestitures, the accrual data inone period may not correspond to the cash flow data in another. Collins and Hribar (2001)provide evidence that these transactions are fairly common during their sample period1988-1997, with over a third of their sample engaging in mergers and or discontinuedoperations. These transactions can cause current accruals to be based on a different entitythan future cash flows. A related issue arises for rapidly growing firms. The cash fromoperations in t+ 1 may be greater than amounts accrued in t due to growing sales. In thiscase, cash from operations n periodt+ 1 containsadditionalmeasurement rror,as it in-cludes the cash flow effects of sales for period t+ 1 as well as for period t, and is thereforelikely biased downward further.

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IV. EARNINGS QUALITY AND DISCRETIONARY ACCRUALSThe purpose of this section is to link the DD analysis of earnings quality to the literatureon discretionary accruals, and in particular, the Jones (1991) model. Jones' intent was toseparate discretionary accruals (DA) from nondiscretionary accruals (NDA). DD's intent isto assess accruals as a whole-they do not attempt to separate management-induced effects(the analog of DA) from all other effects. Linking the approach taken by DD with thattaken by Jones (1991) has the potential to strengthen both approaches, and to calibrate theerrors associated with Jones' measure of discretionary accruals and DD's measure of earn-ings quality.As discussed in McNichols (2000), there are many reasons to suspect that the estimateddiscretionary accruals from the Jones model reflect nondiscretionary forces ratherthan purediscretion. In particular, the Jones model assumes accruals react to the current change insales, but that lagged and future changes are not relevant. Counter to this assumption arethe assumptions in Bernard and Stober (1989) and Dechow et al. (1998) that accruals donot fully adjust to a contemporaneous sales shock; rather,adjustment occurs over succeed-ing periods. Furthermore,anticipation of future sales growth is likely to influence manage-ment's estimates, as reflected in accruals. Consistent with this, McNichols (2001) documentsthat analysts' long-term earnings growth forecasts have significant explanatory power forresiduals estimated using the Jones model, suggesting that growth is a significant correlatedomitted variable in this model.The estimation results in DD suggest that including cash flows in the Jones modelmight reduce the extent to which the model omits variables that are correlated with samplefirms' economic fundamentals. Relatedly, measurement error in DD's estimation may pre-clude them from controlling for the fundamental factors influencing accruals. Therefore,including sales in the DD model provides a useful specification check on the magnitude ofmeasurement error in their cash flow variables. To assess this, I compare the incrementalexplanatory power of the independent variables in each of these models for the other, toprovide evidence on the validity of each specification.To test for a relation between discretionary accrual estimates from the Jones (1991)model and cash flows, I examine a sample of all nonfinancial firms on the Compustat annualresearch files during 1988-1998.3 This sample period permits me to use SFAS No. 95(FASB 1987) statement of cash from operations data to estimate accruals, rather than abalance sheet approach. Given the findings of Collins and Hribar (2000), I exclude com-panies with mergers, acquisitions, or discontinued operations, as indicated by Compustatfootnote 1.4

To examine whether cash flows have explanatory power for accruals after controllingfor the change in current period sales and the level of plant and equipment, and vice versa,I estimate the following equations:AWCt = bo + b, CFOt,_ + b2 CFOt + b3 CFOt+?+ E, (1)

AWCt = bo + b, ASalest + b2 PPEt + et (2)AWCt = bo + b, CFOtl + b2 CFOt + b3 CFOt+I + b4 ASalest + b5 PPEt + E, (3)

3 The sample ncludesfirmswith SIC codes from2000-3999.4 Specifically,all firm-year bservations oded by Compustat s experiencingan accounting hange,mergeroracquisition, r discontinued perations r a fiscalyear changethataffectedsales wereexcluded.

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The Accounting Review, 2002 Supplement

whereAWCt s defined as in DD to includethe changein accountsreceivable(item 302),the changein inventory item 303), the changein accountspayable(item304), the changein taxes payable (item 305) and change in other assets (item 307); CFO, is cash fromoperations rom the SFAS No. 95, Statementof Cash Flows, (item 308); and the ASales,.(item 12) and PPEt (item 7) are the change in sales and the level of property, plant, andequipment, respectively.5 Equation (1) is DD's empirical model, as characterized by theirEquation (5) and Equation (2) is the Jones model. Equation (3) includes the explanatoryvariables from Equations (1) and (2), to assess whether included variables in either ofEquations (1) or (2) have explanatory power for the other equation.The estimation results for the above equations are in Table 1. The findings confirmthat, consistent with DD, accruals are significantly positively associated with prior year,current year, and subsequent year cash from operations; the R2 is .20. The coefficientestimates are 0.0543, -0.2214, and 0.1312, with associated t-statistics of 23.33, -60.18,and 41.72, respectively. Consistent with DD, the strongest association is with current cashfrom operations.

Jones(1991)includesdepreciationn her measureof accruals,but to allowforconsistencywithDD, the measureof accrualsadoptedhere excludesdepreciation.

TABLE 1EstimationResults from Regressionof Changes in Working Capital onCash Flows, Change in Sales and Plant and EquipmentThis tablepresentsestimationresultsfor the sampleof 15,015 firm-year bservationswith availabledatafrom the CompustatAnnualIndustrials nd Research ile, with SIC codes 2000-3999 for years1988-1998. Observationswithmergerandacquisitions,accountingchanges,fiscalyearchanges,and discontinued perationsare excluded.

AWC, = bo + b, CFO,_, + b2 CFO, + b3 CFO,t+ + s, (1)AWC, = bo + b, ASales, + b, PPE, + st (2)AWCt= bo + b, CFOt_, + b2 CFO, + b3 CFOt+, + b4 ASalest + b5PPE, + E, (3)

EstimationIntercept CFO,_1 CFO, CFO,+, ASales, PPE, AdjustedR2 F-value n1 0.0154 0.0543 -0.2214 0.1312 0.2011 1260.9 15015

27.57 23.33 -60.18 41.722 0.00951 0.0802 -0.0052 0.0730 592.26 150150.57 33.74 -5.573 0.0096 0.0645 -0.2409 0.1251 0.0966 -0.0027 0.3009 1293.38 1501512.18 29.41 -69.31 42.48 45.93 -3.32

Variable efinitions:AWCt= changes n workingcapitalaccountsas disclosedon the statement f cash fromoperations,measuredas the increase n accounts eceivable Compustat ata tem#302) plusthe increasen inventory#303)plus the decrease n accountspayableand accrued iabilities(#304) plus decrease n taxes accrued(#305)plusthe increase decrease)n otherassets(liabilities) #307),deflated y beginningotalassets;CFOt= cash fromoperationsn yeart (Compustat ata tem#308);ASALES= change n sales (data tem#12) deflatedby beginning otal assets(data tem#6); andPPE = property, lant,andequipment eflatedby beginning otal assets(data tem#6).

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The next set of estimation results is for the Jones model; these results indicate signif-icantexplanatory ower,with anadjustedR2of .07 and F-statisticof 592.3, butsubstantiallyless than the estimation based on DD's model. Accruals and the change in sales are sig-nificantly positively associated, as indicated by a coefficient of 0.0802 and t-statistic of33.74.The third set of estimation results combines cash flow variables from DD's model withJones model variables. The findings indicate that both models are likely significantly mis-specified, in that both the cash flow variables and the change in sales remain highly sig-nificant;the R2 increasesto .30. The coefficient on the change in sales is 0.0966 with at-statisticof 45.93.The findings in Table 1 suggest misspecification n both the Jones and DD models.Specifically, he estimationresultsforEquation 3) indicatethat the residual romEquation(1) is significantlycorrelatedwith the changein sales, consistentwith cashfromoperationsbeing a noisy proxyfor the cash flows recognized n accruals.The findings n Table1 alsoindicate that the residualfrom Equation(2), the Jones model, is significantlyassociatedwith lagged, current,and futurecash flows. Because these variables most likely reflectfundamentals o a greaterextent than discretion,the findingsindicate that estimates ofdiscretionary ccrualsbasedon the Jones model likely includea substantialnondiscretion-ary component.The findings ndicate that researchers hould considerthe implicationsof both the DDandJonesmodelsto developmorepowerfulapproacheso the estimationof earningsqualityand the role of managementdiscretion n influencingearningsquality.As McNichols andWilson (1988) discuss, to the extent a proxy for discretionaryaccrualscontainsmeasure-ment errorthat is correlatedwith the partitioningvariables n a study'sresearchdesign,inferencesareaffected.This holdsfor studiesof earningsqualityas well. Takenas a whole,the findingssuggests that furthermodelingof the relationbetweenaccrualsand cash flowscould yield substantialmprovementsn our abilityto understand he factors thatinfluenceearningsquality.This should also yield substantialmprovementsn our ability to test formanagement's xerciseof discretionover accruals.

V. CONCLUDING REMARKSIn my view, the paperby Dechow and Dichev (2002) makes two contributions.First,it providesa characterizationf the relationbetween accrualsandcash flows thatcapturesan important element of earnings quality-estimation error in accruals. This paper extendsthe modeling in Dechow (1994), Dechow et al. (1998), and Barth et al. (2001) by incor-porating the role of estimation error, and by drawing an explicit link to earnings quality.The second contribution is to operationalize this characterization empirically and pro-vide some evidence on its validity. Prior literature has provided evidence on the contem-poraneous relation between accruals and cash flows (Rayburn 1986; Bowen et al. 1986;McNichols and Wilson 1988; Bernardand Stober 1989; Dechow 1994; Dechow et al. 1998).Prior literature has also provided evidence on the relation between accruals and future cashflows (Finger 1994; Dechow et al. 1998; Barth et al. 2001). The present paper corroboratesmany of the findingsin these earlier studies. In addition,it suggests a rationalefor anempirical specification relating accruals to cash flows from the prior, contemporaneous, andsubsequent periods.The approach taken in this paper suggests several future research directions. The firstdirection is to enrich the modeling by specifying the process generating cash flows, theinformation available to management, management's estimation task, and the consequencesof these estimates. One can then incorporate management's incentives to report objective

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The AccountingReview,2002 Supplementvs. biased accruals, and determine the implications of these enrichments for the relationbetween accruals and cash flows. The second direction is to focus on specific accrualsrather than aggregate accruals. The complexity associated with modeling the estimationerrors in aggregate accruals is daunting, and the construct validity associated with a proxybased on aggregate accruals seems low. A focus on specific accruals can permit a morecomplete characterization of the relation between accruals and cash flows, and can poten-tially result in a better understanding of the role played by estimation error. For example,studies in the property and casualty insurance area (e.g., Petroni 1992; Petroni et al. 2000;Beaver and McNichols 1998, 2001) focus directly on loss reserve errors, which reflect thechange in management's estimates of claim loss reserves over time. The potential to developmodels of specific accruals such as restructuringreserves, warrantyliabilities, and specificcomponents of currentaccruals is largely untapped. Such development can potentially allowbetter understanding of the forces shaping management's choices and their relation to themeasurement error in earnings.

REFERENCESBarth,M., D. Cram,and K. Nelson. 2001. Accrualsand the predictionof futurecash flows. TheAccounting Review 76 (1): 27-58.Beaver,W. H., and M. F. McNichols. 1998. The characteristics nd valuationof loss reservesofproperty casualty insurers. Review of Accounting Studies 3 (1-2): 73-95., and . 2001. Do stock prices of propertycasualtyinsurers ully reflect informationaboutearnings,accruals,cash flows and development?Reviewof AccountingStudies6 (2-3):197-220. and K. Nelson. 2002. Management f the loss reserve accrualand the distributionof earnings n the property-casualtynsurancendustry.Workingpaper,StanfordUniversity.

Bernard,V.L., andT. Stober.1989. Thenatureand amountof informationn cash flows andaccruals.The Accounting Review 64 (4): 624-652., and D. Skinner.1996. What motivatesmanagers' hoice of discretionary ccruals?Journalof Accounting and Economics 22 (1/3): 313-325.Bowen, R., D. Burgstahler, nd L. A. Daley. 1986. Evidence on the relationshipsbetweenearningsand various measures of cash flow. The Accounting Review 61: 713-725.Collins,D. W.,and P.Hribar. 001. Errorsn estimatingaccruals: mplicationsorempirical esearch.Workingpaper,The Universityof Iowa.Comiskey, E., and C. W. Mulford. 2000. Guide to Financial Reporting and Analysis. New York, NY:JohnWiley& Sons.Dechow,P.M. 1994. Accountingearningsand cashflows as measuresof firmperformance: heroleof accounting accruals. Journal of Accounting and Economics 18 (1): 3-42., R. G. Sloan, and A. P. Sweeney. 1995. Detectingearningsmanagement.TheAccountingReview 70 (2): 193-225., S. P Kothari,andR. L. Watts. 1998.The relationbetweenearningsand cash flows. Journalof Accounting and Economics 25 (2): 133-168., andI. D. Dichev.2002. The qualityof accrualsandearnings:The role of accrualestimationerrors. The Accounting Review (Supplement): 35-59.Demski,J., and H. Frimor.1999. Performancemeasuregarblingunderrenegotiationn multi-periodagencies. Journal of Accounting Research 37 (Supplement): 187-214.Financial Accounting Standards Board (FASB). 1987. Statement of Cash Flows. Statement of Finan-cial Accounting Standards No. 95. Norwalk, CT: FASB.Finger, C. 1994. The ability of earnings to predict future earnings and cash flows. Journal of Ac-counting Research 32 (2): 210-223.Healy, P. M. 1985. The effect of bonus schemes on accounting decision. Journal of Accounting andEconomics 7 (1-3): 85-107.Jonas, G., and J. Blanchet. 2000. Assessing quality of financial reporting. Accounting Horizons 14(3): 353-363.

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Jones, J. J. 1991. Earningsmanagementduring importrelief investigation.Journalof AccountingResearch29 (2): 193-228.Kasznik,R. 1999. On the associationbetweenvoluntarydisclosureandearningsmanagement.ournalof AccountingResearch37 (1): 57-81.McCulloch,B. W., and E. L. Black. 2002. Theoreticalandempiricalrelationsamongcomponentsofaccrualsunderearningsmanagementn a multi-period etting. Workingpaper,New ZealandTreasury ndBrighamYoung University.McNichols, M., and G. P. Wilson. 1988. Evidence of earningsmanagementrom the provisionforbad debts.Journalof AccountingResearch26 (Supplement): -31.. 2000. Researchdesign issues in earningsmanagement tudies.Journalof AccountingandPublicPolicy 19 (4-5): 313-345.Moses, 0. D. 1987. Incomesmoothingand incentives:Empirical estsusingaccounting hanges.TheAccountingReview62 (2): 358-377.Penman,S., and X. Zhang.2002. Accountingconservatism,hequalityof earningsand stockreturns.TheAccountingReview 77 (2): 237-264.Petroni,K. 1992. Optimisticreporting n the property-casualtynsurance ndustry.Journalof Ac-countingand Economics 15 (4): 485-508., S. G. Ryan,and J. M. Wahlen.2000. Discretionary ndnon-discretionaryevisions of lossreservesby property-casualtynsurers:Differentialmplications or futureprofitability,isk,andmarketvalue. Reviewof AccountingStudies 5 (2): 95-125.Rayburn, . 1986. The associationof operating ash flow andaccrualswith securityreturns. ournalof AccountingResearch24 (Supplement): 12-133.Schipper,K. 1989. Commentary n earningsmanagement.AccountingHorizons3 (4): 91-102.

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Quality of Accruals and Earings